Argentina peso recovers on dollar auction although tensions remain

Argentina peso recovers on dollar auction although tensions remain

Argentina’s peso weathered a hectic day on Tuesday, but a weak close after an auction of $500 million in central bank reserves showed that it is not out of the woods yet.

On Tuesday, the government, battered by a rout in emerging markets stemming from a currency crisis in Turkey, announced measures to reduce spending by some $2.3bn over the next two years and stabilise the peso, which plunged to an all-time low of 30.72 per dollar Monday.

The moves follow a decision by the central bank Monday to raise the benchmark overnight interest rate 500 basis points to 45 per cent, helping the peso recover to under than 30 per dollar in spot markets Tuesday.

But at the auction for $500m in dollar reserves, the bank got only $200m in takers at an average cut-off price of 29.4031 per dollar.

Juan Manuel Pazos, head strategist at Buenos Aires broker Puente Hermanos, said the lower-than-expected sale actually was “good news,” adding that it showed that the bank sought not to strengthen the peso, which had been expected, but only to moderate the pressures on the currency.

The bank kept the peso at the spot rate at the time of the auction, he said.

There still could be pressure on the peso, he warned, as the government seeks to roll over a portion of around $18bn in Lebacs, or short-term notes, falling due Wednesday.

The stock of Lebacs has surged over the past two years, and each maturity has put pressure on the peso, on concern that holders will cash them in for dollars.

That was one of the drivers of the peso’s plummet on Monday, as more than half of the outstanding Lebacs mature this week. This tension led the bank to announce on Monday that it plans to eliminate nearly $34bn in Lebacs by the end of the year, replacing them with longer-term securities.

The Treasury will offer 104-day and 224-day peso bills at auction Wednesday, hoping to attract some of the Lebac liquidity. Even so, there are concerns about the bank’s strategy. Gabriel Torres, a senior analyst at Moody’s, a credit-rating agency, said that while the rate hike will support the peso, it could weigh on the economy.

“We expect a contraction of the economy this year and we only foresee moderate growth in 2019,” he wrote in an email. “While the government is well positioned to meet fiscal targets this year, lower growth in a high interest rate environment will complicate fiscal consolidation efforts of the authorities for 2019, a negative factor in terms of credit.”

The peso closed above 30 per dollar in secondary markets on Tuesday.

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